Business context and reporting period
New England Realty Associates Limited Partnership (NYSE MKT: NEN) filed this unaudited Form 10-Q for the quarter ended March 31, 2023. It owns 30 properties, including 2,892 apartments, 19 condominium units and commercial space, primarily in Eastern Massachusetts and Southern New Hampshire, and holds 40%–50% interests in seven unconsolidated joint ventures. The interim results are not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $17.69 million | $16.58 million | Up 6.7% |
| Operating expenses | $13.24 million | $12.80 million | Up 3.4% |
| Income before other income and expense | $4.45 million | $3.78 million | Up 17.9% |
| Net income | $1.75 million | $342,000 | Up $1.41 million |
| Net income per unit | $14.89 | $2.82 | — |
| Net cash from operations | $2.38 million | $4.58 million | Down $2.20 million |
Revenue growth was led by rental income, up $1.11 million. Rental income was 94% residential and condominium and 6% commercial. Operating margin before other income and expense was approximately 25.2%, compared with 22.8% a year earlier; net margin was approximately 9.9%, compared with 2.1%.
Interest income rose to $975,000 from $34, primarily from Treasury bills, while interest expense increased 12.9% to $3.90 million following property refinancings and higher debt. Income from unconsolidated joint ventures was $228,000, versus $20,000. Repairs and maintenance increased 21.2% and taxes and insurance increased 8.5%; lower depreciation and operating expenses partly offset these increases.
At March 31, cash and cash equivalents were $24.65 million, down from $49.56 million at year-end. Treasury-bill investments were $97.76 million, making cash plus Treasury bills approximately $122.41 million. Cash fell by $24.91 million as the Partnership invested in Treasury bills, acquired property and funded improvements. Investing cash outflow was $20.02 million, including $8.97 million for rental-property purchases and net Treasury-bill purchases; financing outflow was $7.26 million, including $5.70 million of partner distributions and $944,520 of unit repurchases.
Mortgage notes payable were $410.45 million, net of deferred financing costs, versus $410.97 million at December 31, 2022. The weighted-average mortgage rate was 3.69%; most mortgage debt is fixed-rate. The Partnership’s proportionate share of joint-venture non-recourse debt was approximately $70.78 million, separate from its balance-sheet mortgage debt. Partners’ capital was negative $64.93 million. The filing reports no outstanding balance on the revolving credit line.
Material changes and notable transactions
- Rental income increased 6.7%; management attributed growth in part to rent increases and the acquisition of 653 Worcester Road.
- The Partnership acquired a roughly 20,700-square-foot commercial property in Framingham on January 18 for approximately $10.15 million, funded from cash reserves.
- Residential rents increased an average 6.3% for renewals and 10.4% for new leases in Q1. Residential vacancy was 2.1% on May 1, 2023, versus 2.0% a year earlier; joint-venture vacancy rose to 2.5% from 0.6%.
- Q1 distributions included $9.60 per unit quarterly and a $38.40-per-Class A unit special distribution, equivalent together to $1.60 per depositary receipt. A further $12.00-per-unit quarterly distribution ($0.40 per receipt) was approved May 8, payable June 30.
Outlook, risks and unusual items
Management expects a strong rental market and continued rent growth for the balance of 2023. It says operating cash should be sufficient for current operations, distributions, required debt payments and planned property improvements, while noting cash flow may fluctuate with property sales or refinancings, capital spending, rents, expenses and tenant changes. The Partnership holds reserves for potential acquisitions; if suitable acquisitions are unavailable, it may repurchase depositary receipts.
The Partnership was not in compliance with the revolving credit line’s minimum debt-yield covenant at March 31, 2023 and cannot draw on the facility until it meets the required covenants. Although the facility commitment is $25 million, the line is unavailable while the breach persists. The report identifies interest-rate, refinancing, local real-estate-market, tenant collection, operating-cost, insurance, environmental and acquisition risks. Management reported no known material environmental liabilities and no material litigation.
A ransomware attack on the management company in October 2022 encrypted on-premise systems. The Partnership reported no monetary damage or loss of financial data, and files and systems were restored using verified off-site backups. However, management concluded that disclosure controls were ineffective at March 31, 2023 because recovery delayed financial reporting. Remediation work was underway, with management expecting the material weakness to be remediated by June 30, 2023. The filing says the incident prevented timely filing of this 10-Q.
Other items to note: the Partnership reported a $165,887 unrealized loss on interest-rate swaps in other comprehensive income; it expects $114,000 to be reclassified as a reduction of interest expense over the next 12 months. Related-party management and service arrangements include fees and reimbursements paid to The Hamilton Company, an entity related to the general partner. No material litigation or material change in the annual-report risk factors was disclosed.
Important facts for investors to verify
- Progress and evidence supporting remediation of the ransomware-related material weakness and restoration of effective reporting controls.
- Whether the Partnership regains compliance with the debt-yield covenant and access to its revolving credit facility.
- Liquidity and planned uses of cash and Treasury bills, including acquisition, capital spending and distribution needs.
- Debt maturity and refinancing exposure, especially the $22.06 million scheduled for 2026 and $23.16 million for 2028, as well as joint-venture debt and related guarantees.
- Sustainability of rent growth and occupancy, and the higher joint-venture vacancy rate.
- Related-party charges, governance and ownership interests, alongside the planned distributions and unit repurchases.